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Monday, October 26, 2009

With some businesses in south King County finding it extremely difficult to buy enough flood coverage, Washington’s top insurance regulator is calling for broader powers to intervene when a local insurance market collapses.

“We keep hearing from businesses and brokers who say that the traditional market for flood coverage has dried up in parts of the Green River Valley,” said state Insurance Commissioner Mike Kreidler. “Other than federal flood insurance, some say they cannot find additional coverage at any price.”

Kreidler’s office is working with lawmakers on a draft bill for the upcoming legislative session. He’s seeking broader powers to create a “joint underwriting association” (JUA) when critical coverage becomes all but impossible to find.

For most homeowners and many businesses, the first stop for flood coverage is the National Flood Insurance Program, a federal program. Federal flood coverage is still available. But NFIP coverage limits for businesses are capped at $500,000 for a building and $500,000 for contents.

That’s often not enough for businesses, which can own property worth millions of dollars more. They also can face significant business-interruption losses from flooding. As a result, many businesses buy additional flood insurance above the federal maximum. Normally, they have no problem finding such coverage.

In parts of the Green River Valley, however, many insurers are apparently leery about the fact that the Army Corps of Engineers has said that a weakened abutment beside the Howard Hanson Dam means that the Corps may have to release more water than usual from the dam. That’s raised the possibility of flood waters overtopping levees downstream. And the Corps has said that the increased flood risk is likely to continue for several years.

In cases like this, where individual companies are unwilling to offer coverage, a joint underwriting association can be established to help fill the gap. More than two dozen states have broad JUA laws already.

Here’s how a JUA works: When coverage dries up, the insurance commissioner could intervene and order insurers to band together to provide start-up financing and guarantee solvency for a joint underwriting association. The JUA then functions as a not-for-profit insurer of last resort. The coverage may be expensive – with insurance, higher risk means higher prices -- but at least coverage is available in most cases.

“I don’t want to raise false hopes. Even if this legislation passes quickly, it’s unlikely that a JUA could be set up in time to help this winter,” said Kreidler. “But this flood risk may last for several years. And we need to be able to respond quickly to this and other potential crises.”

Any joint underwriting association must now be approved by the state legislature. (Two have been approved: one for midwives and another for daycares.) Since Washington’s legislature typically meets only in the first few months of each year, that can make it difficult to rapidly respond to a sudden collapse of the market.

Kreidler’s office sought such legislation in 2003. Insurers opposed the bill, which died in committee.

But with business owners struggling to find coverage in the Green River Valley and many millions of dollars of uninsured property in the potential flooding area, Kreidler said it’s clearly time to try again.

“This flooding is exactly the type of crisis that insurance is designed to protect against,” he said. “Businesses, jobs, inventory and expensive equipment are at risk. Situations like the one below the Howard Hanson Dam are very rare. But when they happen, we need to be able to respond quickly and ensure that people can get insurance coverage.”